The Decibel - What you need to know about your CPP money

Episode Date: March 26, 2024

For most workers in Canada, there’s a chunk of money deducted from each paycheck that goes toward the Canada Pension Plan. It happens whether you want it to or not. That’s because the CPP was set up to force people to save for their retirement. Canadians become eligible to receive a monthly payment when they reach the age of 60. However, many factors determine how much money an individual will get.Brenda Bouw, a reporter for Globe Advisor, explains how CPP works, what determines how much you get and the debate around what’s the right age to claim it.To visit The Globe’s CPP calculator, click here.Questions? Comments? Ideas? Email us at [e-mail]

The Canada Pension Plan. You pay into it when you're young, and you get money back later through regular payments in your retirement. Simple. Well, maybe not so much. There are lots of details about Canada's pension plan that you might not be familiar with. But you should be, because the CPP is often the foundation of people's retirement income. So today we're talking to Brenda Bowe. She's a reporter with Globe Advisor, a special section of the Globe that provides in-depth investing information. Brenda will go through what you should be thinking about at each stage of your career when it comes to the Canada Pension Plan. I'm Mainika Raman-Wilms and this is The Decibel from The Globe and Mail.

Brenda, it's great to have you on the show for the first time. Thank you for being here. Thanks for having me. So before we get into the questions that people have around CPP, I just want to go over some of the basics here. How would you describe CPP and how it works really in really broad strokes? The Canada Pension Plan or CPP as we refer to it is really like a cornerstone of many Canadians retirement plans. It's something that you get paid for life once you're eligible to take it and then it's indexed to inflation. So how it works is that all employees over age 18 who make more than $3,500

a year are required to contribute a percentage of their employment income to the CPP. So when you have your paycheck, that's the amount you see deducted every couple of weeks or whenever it is that you get paid. And then those contributions you make are based on the amount between $3,500 and a maximum amount set each year, which is based on your average wages. And that's known as your maximum pensionable earnings. And this year, 2024, that amount is $68,500. Okay. So everyone sees this come off their paycheck every time. How much is actually coming off your paycheck? So the amount is 5.95%, and then it can go up from there depending on your income and some of the enhancements that were put in place starting in 2019.

So basically, if you earn more than the maximum, which is that $68,500, there's another earning ceiling where you need to contribute more. And the whole idea behind that is that you benefit from a higher payout later in life when it's time to collect your CPP benefits. Okay. And does everyone across Canada, everyone working in Canada basically contribute to this Canada pension plan? Yeah, everyone who's paid a salary from an employer. So whether you're flipping burgers at a fast food joint, or you're a CEO or manager at a company, if you're getting paid a salary, you work for an employer, you pay half a contribution amount. And it's typically those small amounts that are

deducted from each of your paychecks. And then your employer covers the other half of it. If you're self-employed, which many people are these days, an increasing number of people, you know, if they have side gigs or they work for themselves, you pay both sides of the CPP because you're both the employer and the employee. And the only way that you wouldn't do that is if you're a self-employed person and you have a corporation. So you've incorporated your business. And also incorporation just comes with a whole different set of tax rules and administration and fees, which we'll just leave for another time. A whole other set of things, yes. A whole other set.

Okay. In Quebec, it's an exception, though, right? You're paying into a different plan? Yeah. Quebec has its own plan known as the Quebec Pension Plan. It's largely the same. There's a few little nuances and things, but largely they just have their own plan. Okay. So every paycheck we see, you know, either 5.95% deducted or maybe a little bit more depending on how much we earn.

But, Brenda, what actually happens to that money? So it comes off your paycheck. Where does it actually go? So all of that money goes into this sort of pot that is invested. And then it's that revenue earned on those investments that is invested and grows. So it was set up to respond to projections that the employee contributions wouldn't be sustainable. It didn't look like it was going to last. A lot of people were worried about it. So back then, CPP investments started with $12.1 million in 1999. And today, according to its website, it has about $600 billion in assets. It does pretty well. It returned, according again to its figures,

9.3% return, 10-year annualized return. So pretty good. Yeah. So it's going to this investment board then. I just want to clarify, though, because this is a government program, but this money isn't actually going to the government then, and we get it paid out later. How does that work? Correct. So there is a bit of a misconception that the government can sort of dip into this fund and use it, you know, you'll pay off its soaring debt, that sort of thing, but they can't. CPP Investments is an arm's length organization. It has an act, the Canada Pension Plan Investment Board Act, which safeguards against any political interference. The money it manages is strictly separate from government funds.

So once someone starts to withdraw CPP, how much do they usually get monthly on average? There is a monthly amount. There's sort of the maximum that you can get, and then there's the reality that people get. But the maximum monthly amount that someone can get this year, if they started taking it at age 65, is just under $1,365. So to get that maximum amount monthly, you would generally need to have 39 years of maximum contributions at age 65. But because many of us spend time, you know, in school earlier in our, you know, from 18 to, you know, mid 20s, maybe even into our 30s, or we have breaks in employment for, you know, to have kids or just to take a break, or also people who might retire early, they wouldn't ever reach the maximum or it's highly unlikely.

Government data shows that the average CPP paid out as of last fall was about $758 a month. So that's quite a difference from the $1,365. Is it possible to outlive your payments? I think this is something people sometimes worry about, that you're going to get stuck without a CPP payment. Is that possible to outlive those payments? It doesn't run out. It's for life. So the first thing to note is that if you wait to take your CPP, the longer you wait, the more money you get. So if you take it at 60, you actually get 7.2% a year less than if you took it at 65. But if you take it at 70, you actually get 8.4% more than if you took it at 65. A lot of people point to something called

the break-even age, which is basically a mathematical calculation. And the globe has a calculator that people can go and play with if they want, where you determine if by waiting, you can collect payments long enough to make up for what could be years of foregone payments. For instance, I plugged in my own numbers. So it said if I wanted to take it at 60, that my breakeven age is 79. So that means that if I don't expect to live past 79 I might be better off taking my CPP at 60 then I put in 65 if I want to take a 65 and my quote break-even age is 84 so that means if I don't expect to live past 84 I might be better off taking it at 65 but if I expect to live past 84 I might be better off waiting till 70 so, it's a lot of math and you can play with the math. The bottom line is that nobody knows when we're going to die or how long we're going to live in Canada for many years, but then you leave, you go somewhere else. Do you still get a CPP payment later in life? Yeah. So if you did contribute to the CPP at any point that you were in Canada,

I asked some experts this and they said that you definitely can still get those payments if you move to another country later in life. And there's no minimum requirement, just as long as you qualified and contributed to the plan. And apparently, you can also have your CPP paid into a foreign bank account. Okay. So Brenda, there is a lot of money in the CPP pot right now, right? At the end of 2023, as you said, all of the plan's assets totaled almost $600 billion. But I still wonder, is that enough? Like, how do we know there will be enough money for payouts for people, you know, who are maybe just starting to work right now? So we have to rely on the information from what's called the Office of the Chief Actuary of Canada. So that's the big accountant, as of their last report, which was in

2022, to be financially sustainable for at least the next 75 years. So that's until the year 2100. What they take into consideration is just sort of the growing base of contributors and their employment earnings, the rising number of people taking their pension benefits relative to the contributors. So, you know, the boomers versus the millennials and the and other generations that are contributing, and then just expected increases in life expectancy. So it's a lot of sort of actuarial words there, but that's how they describe how they do it. Yeah. Yeah. Let's dig into this just for another minute here, because it sounds like it's good that it'll be fine for another 75 years. That is good news.

But I still wonder, how do they account for the fact that generations, you know, shrink and swell over time, like lots of baby boomers taking out payments now and, you know, far fewer Gen Zs feeding into the plan? How do they make sure that math works out? Well, I think part of the response are these CPP enhancements that started to creep into your paychecks in our paychecks in 2019. This is just sort of a way, I think, to help make sure that there's enough money and more money for folks, you know, as they get closer to retirement for generations to come. And this enhancement you're referring to, this is basically an increase in the percentage that comes off your paycheck, right?

It used to be 4.95 was the base, and now it's 5.95. Correct. Yes. Yeah. I guess I wonder about the stability of the fund overall, though, because, you know, recent news in the last few months, Alberta was trying to withdraw from it, right, to set up their own pension fund. So if a province were to pull their funds from the CPP, actually go through with that, I guess, wouldn't that jeopardize the fund's viability for future generations?

I mean, it definitely sounds precarious. And as you alluded to, Alberta is looking into how much it might get. The federal government is doing its own calculations. So it's definitely something that, you know, I think everyone's watching closely. I personally think, you know, there's not really a need to panic because people in Alberta are very divided on the subject and it would have to go to a referendum. But I think it's probably too early to know how much we should be concerned about the long-term future. We'll be back in a minute. All right, Brenda, let's now look at the CPP from various stages of life. So if you're in Gen Z and maybe you're just starting to work now or you've just been working the last few years, what is something that you should be thinking about when it comes to the CPP?

So I think down the road, you'll be happy that you paid it. And, you know, it's like visiting the dentist, you know, and apologies to dentists, but you may not want to do it, but you know, it's good for you in the long term. So also with the enhancements that we talked about earlier, Gen Z is poised to benefit the most from these enhanced CPP system because it covers most of their working lives, especially compared to Gen X and boomers. And is there any way to top up your payments when you're young so you can,

I guess, maximize how much you're contributing? No, you can't, unfortunately. And I asked a financial planner about this and they thought it was a great concept, but said you can only contribute based on your employment or self-employment income for the current year. So there's no optional contributions. All right, let's move on to the millennial, even elder millennials, Gen X workers out there who are perhaps, you know, now kind of in their prime working years, what are some of the considerations for them? So I think that the older millennials and Gen X need to really start thinking about how much CPP they'll get and how much of a role it'll play in their overall retirement plan, you know, when they include it with their RRSPs and their TFSAs and all those other acronyms that they've thrown money into over the years. And then that answer can help them figure out when or maybe it's if they can retire.

The other thing, too, is retirement is such a personal thing. And I interview a lot of retirees for different Globe stories. And a lot of them say retirement is also work. It's just a different kind of work. But you have to work at being retired if you want to have a good retirement. So kind of managing your funds and figuring out if you have enough, that kind of thing. Yeah. Yeah. And also just managing like how you're going to spend your time in retirement. Right. So we think so much about retirement when we're working. But then when you get into retirement, you have to think about how you'll spend your money and spend your time. OK, so well, then then next let me ask you about people who are approaching retirement. What's the number one thing that they should be thinking about?

So they should be thinking about when they want to take their CPP, what age they want to take it, and whether they need it or not, depending on all sorts of factors. So you can start taking it at age 60 and then take it any time between then and age 70. You can take it after age 70, but there's no financial benefit to doing that. If you take it sooner, you get less money. And if you take it later, you get more money is the bottom line. Okay. So let's get into this then. So I guess what is the argument to start taking payments as soon as you can at age 60?

So people take it as early as they can for a few reasons. The first reason and probably the most important reason is they need the money. That extra, whether it's 500, 600 or whatever amount it is a month can really be the difference between paying the bills or not. Some people take it at age 60 because they can, they don't need the money but the phrase that comes up a lot is a bird in the hand is better than two in the bush not an analogy i love but it's fitting for this um so they feel like the money is there so why not take it especially since nobody knows how long they'll live some people argue that the money is put to better use when you're younger in your 60s maybe you're more active you can travel more you might not be as healthy later in life. And then some people also take it

sooner because maybe they're not as healthy, right? They know that their health isn't great. So they want to have the money sooner rather than later. And then another really popular reason that I've heard from readers is that people take it at 60 to invest the money because they feel like they can get a better rate of return than the government can, or they might take the money and put it in a RRSP or a tax-free savings account. So there's a bit of a tax strategy there for some people. And also some financial advisors recommend this, but it's worth noting, and some readers also point this out, that some advisors charge fees based on the number of assets that they manage for you. So I'm not saying that that's exactly why people do it, but that's just something that readers have pointed out as

well. There could be a motivation there. Yeah. Yeah. Okay. Okay. So then, so that's kind of the reasons for why someone would take it out as early as possible, or at least on the earlier side of things. Brenda, what about the flip side? What is the case for waiting until you're 70? So very few Canadians do this. However, in my reporting, I did a story on this. People who waited until 70, most of them just simply said because they get more money and they're healthy and they feel like they'll live into their 80s and 90s. Maybe they have parents who lived a long time. Some also just simply said not only do they get more money, but it's indexed to inflation and it's guaranteed money for life. These are people who have other savings and they don't

need the money to live off. So these are wealthier Canadians then essentially? Yeah, I would say most of the time that can afford to wait and then get more money. And then some, you know, experts would encourage people to wait until 70, not just because you get more money, but because we're living longer. And also the cost of living is going up, in particular, long term care, you know, in your 80s or 90s. This honestly kind of feels like more of an art than a science to some extent here. I guess, Brenda, what have you learned about how people think about this question, the things that they weigh? People are very passionate about their decision when they take the CPP. There's been a lot of feedback. And so I gathered just a few responses. One reader said, delaying CPP is based on the assumption that you will be continuously employed in a good paying career until 65. The calculation is quite different when you get downsized at 55 and get to learn about age discrimination.

At age 60, I needed the money. So that's one. Another reader said, my father died at 66. My brother died at 61. And he got exactly one check from CPP. He was waiting and changed his mind. Although I am working, I'm age 60 this year, I am taking my CPP. I am healthier than most of my family and relatives. However, there are some things beyond your control. So those are some of the health concerns that you were referencing before. Yeah. Yeah.

Yeah. And then a couple on the other side of the argument is one reader says, I find it curious that the main arguments for taking CPP early largely revolve around dying young. I'm hedging in the event of a longer life. If I die prior to my plan date, my family will be fine financially, and I won't be in a position to worry. It's a personal decision. One other one, which I think is pretty succinct, is usually better to wait.

What if you live longer than anticipated? It would be suck to be poor in old age. So yeah, a whole range of how people really think about this question then. Just very lastly here, Brenda, I mean, people seem to have very strong opinions about the CPP for sure. You've been covering this for a long time. I just I guess I wonder, why do you think it elicits such an emotional response from people? There's a psychological element to it. And behavioral science experts boil it down to something they call present bias. It means that we as humans tend to focus more on the present than the future when we're making decisions. And this sort of drives people to take the money maybe sooner than they need to or should. And experts say present bias is what leads us to overvalue immediate rewards and undervalue long-term ones. So that applies sort of the CPP, right? When you look at, I think if I take it sooner, even though

it's less money, I'm better off than if I wait longer term. But again, it's such a personal decision that, you know, people really have to base it on their own circumstances. Brenda, thank you so much for taking the time to be here today. Thanks for having me. That's it for today. I'm Maina Karaman-Wilms. Our intern is Manjot Singh. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show, Adrienne Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.